Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs) in the USA created by US Congress to ensure liquidity, stability, and affordability in the U.S. mortgage market.
The rescue of Fannie Mae and Freddie Mac in September 2008 provides one of the most significant examples of governments choosing institutional preservation rather than liquidation when the failure of major financial institutions was considered capable of damaging the wider economy.
Fannie Mae and Freddie Mac were not ordinary commercial banks. They were government-sponsored enterprises (GSEs) created to support the US housing-finance system by purchasing mortgages from lenders, guaranteeing mortgage-backed securities and providing liquidity to the secondary mortgage market. By 2008 their importance had become enormous: the two enterprises had approximately US$5.4 trillion of outstanding obligations, and in that year they purchased or guaranteed nearly three-quarters of newly originated US mortgages.
Their circumstances were therefore very different from BCCI. Nevertheless, the manner in which the US authorities responded to their financial deterioration provides an important comparison when examining regulatory philosophy, proportionality, protection of confidence and preservation of viable institutions.
Financial Weaknesses and Earlier Accounting Problems
The crisis at Fannie Mae and Freddie Mac did not arise entirely without warning.
Both enterprises had previously faced serious accounting and governance problems. In 2006, the US Securities and Exchange Commission described accounting irregularities at Fannie Mae as sufficiently serious to justify a US$400 million penalty. The SEC subsequently recorded that Fannie Mae and Freddie Mac together paid more than US$450 million in penalties to settle accounting-fraud charges brought in 2006 and 2007.
These accounting cases pre-dated the financial crisis and demonstrated significant weaknesses in governance, financial reporting and regulatory oversight.
The later housing collapse exposed a different but even larger vulnerability. Fannie Mae and Freddie Mac had accumulated substantial mortgage-credit exposure and large retained portfolios. As US house prices declined sharply and mortgage defaults increased, their losses and loan-loss provisions rose dramatically. GAO later identified their large portfolios, risk exposure and earlier accounting problems as important weaknesses in their pre-crisis structure.
By 2008, their ability to raise private capital had effectively disappeared. FHFA subsequently stated that the deterioration in housing markets had so damaged their financial condition that they could no longer perform their missions without government intervention.
The Government Chose Conservatorship, Not Liquidation
On 6 September 2008, the Federal Housing Finance Agency placed both Fannie Mae and Freddie Mac into conservatorship. Their boards consented to the action. Treasury simultaneously established arrangements to provide continuing financial support.
The significance of the word conservatorship should not be overlooked.
The purpose was not simply to wind up the two enterprises and distribute their remaining assets. FHFA's statutory mandate as conservator included taking measures necessary to put them into a sound and solvent condition, carry on their businesses, and preserve and conserve their assets and property.
The enterprises therefore continued operating.
Mortgages continued to be purchased.
Mortgage-backed securities continued to be guaranteed.
Employees remained in place.
Customer and lender relationships were preserved.
The housing-finance infrastructure continued functioning.
In other words, although the authorities concluded that the enterprises had effectively failed without government assistance, failure did not result in institutional extinction.
FHFA later stated explicitly that only Treasury's financial support allowed Fannie Mae and Freddie Mac to continue as operating entities and that no private investors were willing at the time to provide the necessary equity capital.
Extraordinary Public Financial Support
The scale of the intervention was remarkable.
Treasury entered into Senior Preferred Stock Purchase Agreements with both enterprises, under which it committed substantial capital to ensure that their assets remained sufficient to meet their liabilities. The arrangements were specifically intended to maintain financial-market stability, prevent disruption to mortgage finance and provide confidence to investors.
By September 2009, the US Government had committed to make available as much as US$400 billion in capital support. The Federal Reserve separately undertook enormous purchases of agency mortgage-backed securities and GSE debt in an effort to support the housing and financial markets.
This intervention was justified largely by systemic importance.
Treasury Secretary Henry Paulson explained that Fannie Mae and Freddie Mac debt and mortgage-backed securities were held widely by US investors, foreign investors and central banks, and that loss of confidence could have severe consequences for financial markets.
The authorities therefore treated preservation of confidence itself as a public-policy objective.
Problems Were Isolated Rather Than Used to Destroy the Enterprises
The treatment of Fannie Mae and Freddie Mac also illustrates another important regulatory principle.
Their financial problems were not regarded as requiring the immediate abandonment of every mortgage, guarantee, business relationship and operating asset associated with them.
Instead:
- management was replaced;
- government control was imposed;
- capital support was supplied;
- losses were absorbed over time;
- lending standards were tightened;
- problematic legacy mortgages were managed separately;
- legal claims were pursued against institutions alleged to have caused losses;
- and the core mortgage-finance businesses continued operating.
FHFA later brought actions against numerous banks and financial institutions in an effort to recover losses associated with residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac.
The objective was therefore to preserve value while identifying and recovering losses, not to destroy the enterprises because serious failures had occurred.
The Comparison with BCCI
The differences between Fannie Mae/Freddie Mac and BCCI must be acknowledged.
Fannie Mae and Freddie Mac were government-sponsored enterprises central to the US housing system. Their guarantees and securities were deeply embedded in domestic and international financial markets. Their abrupt liquidation in 2008 could have intensified an already severe global financial crisis.
BCCI did not occupy an equivalent role in the US or British financial system That difference is important and provides an explanation for why the US Government was prepared to commit enormous public resources to the GSEs.
The more relevant question is what regulators were willing to do to preserve viable operations once serious losses and management failures had been identified.
Fannie Mae and Freddie Mac were not maintained because they were financially sound. FHFA subsequently stated plainly that they had failed and could survive only because of taxpayer support.
BCCI, by contrast, was not asking Western governments to supply hundreds of billions of dollars of public capital.
Its Abu Dhabi majority shareholders were prepared to provide substantial private financial support and had developed a restructuring programme intended to isolate impaired assets and transfer stronger operations into separately capitalised successor banks.
The contrast can therefore be expressed starkly:
Fannie Mae and Freddie Mac were kept operating even when private capital was unavailable and government support became essential. BCCI had private shareholder support available, yet its restructuring was not allowed to run its course before closure.
Known Problems Did Not Automatically Require Closure
The comparison is also relevant because some of the weaknesses at Fannie Mae and Freddie Mac were known well before the 2008 conservatorships.
Their accounting irregularities had already resulted in major SEC enforcement actions.
Regulators had identified governance and capital concerns.
Their portfolios and mortgage-market exposures were publicly known.
When the later crisis made those weaknesses much more serious, the response was not to argue that earlier problems proved the entire institutions were incapable of reform.
Instead, those problems became reasons for:
stronger control, new management, conservatorship, recapitalisation and restructuring.
That is particularly relevant to BCCI because many of the financial weaknesses underlying the 1991 concerns had also arisen earlier and had already been disclosed to the Abu Dhabi shareholders. Those shareholders had responded by injecting financial support, obtaining majority ownership and participating in a restructuring programme.
The double-standards question is therefore not whether regulators should have ignored new evidence about BCCI.
They should not.
It is whether new evidence necessarily justified abandoning a restructuring designed precisely to address previously identified losses and management failures.
Public Confidence - Preserved in One Case, Destroyed in Another
The contrast in the treatment of public confidence is especially striking.
In the Fannie Mae and Freddie Mac case, the US authorities considered confidence so important that Treasury effectively guaranteed their continuing solvency through the preferred-stock arrangements. The objective was explicitly to assure investors that the enterprises would continue fulfilling their obligations and thereby prevent disruption of the mortgage market.
The Government was concerned not only about American homeowners and banks but about international investors and central banks holding GSE securities.
BCCI's closure produced the opposite consequence.
Confidence was abruptly destroyed.
Depositors across numerous jurisdictions lost immediate access to their accounts.
In Britain, many BCCI retail customers came from immigrant Asian communities. Across the Middle East, Asia, Africa and elsewhere, customers whose relationships with the Bank had developed over many years suddenly found those relationships terminated.
Employees lost their positions and the reputational consequences of the closure extended far beyond those implicated in wrongdoing.
The relevant question is therefore not whether Fannie Mae and Freddie Mac were more systemically important. Clearly they were within the US financial system.
It is whether the interests of BCCI's predominantly non-Western and immigrant customer base were accorded comparable weight when regulators assessed the consequences of destroying confidence in their institution.
That question should be framed as one of regulatory priorities rather than an assertion of deliberate discrimination, but it remains relevant to the wider Double Standards perspective.
Systemic Importance - Explanation or Complete Answer?
The strongest defence of the different treatment is systemic importance.
Fannie Mae and Freddie Mac supported a huge share of the US mortgage market. Their failure threatened the housing sector, domestic banks, global investors and foreign central banks.
BCCI was not considered systemically indispensable to the British or American economies.
This explains why the US Government was willing to use public money on a scale that would never have been contemplated for BCCI.
But systemic importance does not completely answer the BCCI comparison.
It explains why government money was provided to Fannie Mae and Freddie Mac.
It does not necessarily explain why private money offered by BCCI's majority shareholders could not be allowed to support a regulated restructuring.
There is a fundamental distinction between:
“The Government must rescue this institution because no private rescue is available” and “A private shareholder-supported restructuring should be prevented from continuing.”
In the Fannie/Freddie case, the absence of private capital strengthened the case for extraordinary public intervention.
In the BCCI case, substantial private capital was available.
That makes the proportionality question difficult to avoid.
Institutional Preservation Despite Earlier Misconduct
Another aspect of the comparison concerns institutional reputation.
Fannie Mae and Freddie Mac had previously been subject to serious accounting-fraud enforcement actions. The SEC had described Fannie Mae's misconduct as egregious, and both enterprises paid substantial penalties.
Yet those episodes did not permanently define every employee, mortgage or legitimate business activity of the enterprises as part of a “criminal culture”.
Wrongdoing was identified.
Penalties were imposed.
Management and governance were changed.
The institutions continued.
When they later encountered a much larger financial crisis, regulators again distinguished between failures within the enterprises and the economic value of their continuing operations.
BCCI was treated through a markedly different narrative. Allegations concerning senior management and particular transactions came increasingly to characterise the entire institution.
This raises an important question about regulatory language as well as regulatory action:
why could serious misconduct within major Western financial institutions be treated as something capable of remediation, while misconduct at BCCI was used to portray the institution itself as incapable of reform or rehabilitation?
Conservatorship as an Alternative Regulatory Philosophy
The Fannie Mae and Freddie Mac episode also demonstrates that regulators are not limited to a binary choice between:
allowing management to continue unchanged or closing the institution.
Conservatorship represented a third approach.
Management control could be displaced.
Shareholder rights could be severely restricted.
Government or regulatory authorities could assume control.
Existing business could continue.
Losses could be recognised and addressed gradually.
Problem assets could be managed.
And viable operations could be preserved while a longer-term solution was developed.
This is relevant to BCCI because many of the concerns expressed in 1991 related to confidence in previous management and the reliability of information supplied by the institution.
If regulators concluded that previous management could no longer be trusted, that did not necessarily mean the only possible remedy was worldwide closure.
A tightly controlled restructuring under new management, shareholder support and enhanced regulatory oversight represented another conceivable approach.
Indeed, BCCI's restructuring programme was already moving in that direction.
A Particularly Striking Contrast
One of the most striking facts is that FHFA later acknowledged there was no private investor willing to provide equity capital to Fannie Mae and Freddie Mac in September 2008. Only Treasury support allowed them to continue.
BCCI presented the reverse position.
It had a majority shareholder with substantial financial resources prepared to fund the restructuring.
That does not establish that the proposed BCCI plan was satisfactory in every respect.
Regulators could legitimately require:
- more capital;
- complete replacement of management;
- independent boards;
- separation of impaired assets;
- stronger controls;
- independent audits;
- regulatory oversight of the successor banks;
- and prosecution of individuals responsible for wrongdoing.
But these are conditions for restructuring, not necessarily reasons for rejecting restructuring altogether.
The Double-Standards Question
The Fannie Mae and Freddie Mac comparison should therefore not be reduced to the argument:
“America rescued its mortgage institutions, so Britain should have rescued BCCI.”
That would ignore their very different systemic roles.
The stronger comparison concerns how regulators respond when important financial institutions contain serious losses, governance failures and potentially viable businesses at the same time.
In the Fannie Mae and Freddie Mac case, the authorities concluded that:
- institutional failure did not require liquidation;
- preserving market confidence was essential;
- existing operations could continue under new control;
- management could be displaced without destroying the franchise;
- enormous losses could be isolated and absorbed over time;
- government capital could be supplied where private capital was unavailable;
- and the institutions could remain operational while fundamental restructuring took place.
This leads to the central question:
If Fannie Mae and Freddie Mac could be placed under conservatorship, recapitalised with extraordinary public support and kept operating despite severe financial deterioration and earlier accounting misconduct, why was comparable emphasis not placed on preserving BCCI's viable operations through a restructuring financed principally by its own Abu Dhabi majority shareholders?
A second question follows:
If the preservation of confidence among holders of Fannie Mae and Freddie Mac obligations — including international investors and central banks — justified extraordinary intervention, were the interests of BCCI's depositors across Asia, Africa, the Middle East and immigrant communities in Britain accorded comparable consideration before confidence in their bank was abruptly destroyed?
And perhaps the most fundamental question is:
Why was institutional preservation regarded as an appropriate objective when the troubled institution was integral to the Western financial system, while closure was regarded as appropriate for BCCI before its privately supported restructuring had been fully tested?
Perspective
Fannie Mae and Freddie Mac do not prove that BCCI should necessarily have survived.
The situations were different, the legal structures were different and the systemic consequences were different.
But their history demonstrates an important principle:
even an institution that has effectively failed can be preserved where regulators consider its continuing operations valuable.
In 2008, the United States did not allow accounting failures, enormous mortgage losses or the absence of private capital to determine that Fannie Mae and Freddie Mac should simply disappear.
It changed management.
Placed them under regulatory control.
Injected public capital.
Protected market confidence.
Preserved their viable operations.
And continued restructuring them over many years.
BCCI's supporters were asking for considerably less: an opportunity for a restructuring backed by the financial resources of its majority shareholders to proceed while impaired assets and wrongdoing were isolated.
That is why Fannie Mae and Freddie Mac form a relevant part of the wider examination of Double Standards.
The issue is not a demand that every financial institution receive identical treatment.
It is whether the underlying principles of proportionality, preservation of viable operations, protection of innocent stakeholders and willingness to restructure rather than destroy were applied consistently irrespective of the institution's ownership, origins and place within the established Western financial system.
Also read:
- Federal Housing Finance Agency, History of Fannie Mae and Freddie Mac Conservatorships. Official history of the September 2008 decision to place both enterprises into conservatorship and the reasons for intervention.
- Federal Housing Finance Agency, James B. Lockhart III, The Conservatorship of Fannie Mae and Freddie Mac, testimony, 25 September 2008. Contemporary explanation of their deteriorating condition, inability to raise private capital and the rationale for conservatorship.
- US Department of the Treasury, Henry M. Paulson Jr., statement on the GSE actions, 7 September 2008. Explains the systemic importance of Fannie Mae and Freddie Mac and concerns about investors and central banks holding their debt and mortgage-backed securities.
- US Government Accountability Office, Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises' Long-term Structures, GAO-09-782 (2009). A substantial examination of their pre-crisis business model, financial risks, conservatorship and alternative structures.
- US Securities and Exchange Commission, Accounting Irregularities at Fannie Mae (2006). Provides the official record of the accounting case and the US$400 million settlement.
- Government Accountability Office, Fannie Mae and Freddie Mac: Broader Reforms Needed to Improve Oversight and Reduce Federal Fiscal Exposure. Useful for examining the continuing consequences and risks of the conservatorships.
- Double Standards: The Forced Closure of the BCCI Bank. For the BCCI perspective, this should be read alongside the official US record to compare the willingness of regulators to preserve or restructure major Western financial institutions with the treatment of BCCI.
